News Column

The Economic Ground War

April 2003, HISPANIC BUSINESS Magazine

Joel Russell


It may be premature to assess how a U.S.-Iraq war will help or hurt the U.S. economy, but according to studies and CEOs, the gradual build-up to war since late 2002 already has put business on the defensive.

"A military engagement in Iraq will result in slower growth in the first half of 2003," predicts a national report from the Los Angeles (California) County Economic Development Corp. (LACEDC). That translates to GDP growth of 1 to 1.5 percent during the first and second quarters. Assuming the geopolitical issues are resolved by mid-year, "the economy will begin to pick up during the summer and will accelerate into 2004," the report states.

That outlook squares with the experience of Danilo Alonso, CEO of Florida-based Telexport, a sound-equipment distributor with 2001 revenues of $6.25 million. In response to the slowdown, "we are trimming inventory and getting rid of [product] lines that are marginal in terms of profits," Mr. Alonso says. "We have gone through slowdowns before, so we know how to handle them." Like LACEDC, he expects the soft times to end by late summer.

"When oil gets affected, it has a ripple effect," says William Rivera, CEO of Mini-Mailers, a California-based direct-mail house with annual revenues of $6.52 million. "Everyone gets hit in the pocketbook, but it's not concentrated in any one industry. I don't think we'll see anything drastic. We'll just incur more expenses."

Rudy Sandoval, CEO of Sandoval Dodge in Las Cruces, New Mexico, a company with $18.1 million in sales for 2001, blames the downturn not so much on war as on the poor economy leading into it. "[Auto] sales are off about 30 percent over the last six to seven months, and prior to that they were off about 20 percent," he says. "The war situation has nothing to do with it. Mostly, income is not where it used to be. … If the economy doesn't pick up, we're going to have deflation."

Nati Lozano, vice-president at Texas-based International Bancshares, a bank with revenues of $312.5 million, sees companies in a capital crunch. "If you're used to being paid in one to 30 days and now it's 45 to 60 days, suddenly you need additional funds to run the business," he says. To compensate, CEOs can drop slow-paying customers, leverage their assets (often by refinancing a mortgage), or try to gain capital through internal efficiency gains, says Mr. Lozano.

Psychologically, a wartime mentality affects two sides of the small-business economy: consumer spending and investment. Early 2003 data from The Conference Board, a nonprofit research organization, shows consumer confidence at its lowest level since 1993. The University of Michigan's Consumer Sentiment Index also found buyer confidence at a nine-year low.

On the investment side, a Gallup poll in February found investor confidence at its lowest level since 1996. Entrepreneurs seeking capital below the radar of publicly traded equity markets, however, may find better luck. A survey of venture capitalists (VCs) by FundingPost reveals that VCs invest for the long term and do not change their long-term strategies on the basis of current events. From the point of view of start-ups, "Emerging companies today are more realistic in their expectations and understand that with consumer confidence and corporate spending down, they need to adjust their projections and outlook," the survey report states.

Mr. Rivera anticipates the second half of the 2003 prediction the uptick at the end of the year. Although his company hasn't slowed in the last two years, he expects business to pick up once tensions subside and companies feel confident enough to increase their direct-marketing budgets. "A lot of people have been holding off for a while [because of the war]," he says. "If they consider this slow times, once we get this resolved, we'll see good times. They're just waiting for something to happen."


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